Lion H1 Trading Update

Lion today announced its trading update for the half ended 31 March 2011.

August 5, 2011

Lion today announced its trading update for the half ended 31 March 2011 in conjunction with Kirin Holdings’ half year announcement.

Lion continues to pursue its strategy of investing in its people and a focussed portfolio of high potential brands to drive sustainable results in the long term. Business integration is progressing to plan, with the business uniting under one trading name, Lion, since the conclusion of the half.

The former Lion Nathan Australia and Lion Nathan Wine divisions are now referred to as Lion – Beer, Spirits & Wine Australia. The former Lion Nathan New Zealand becomes Lion – Beer, Spirits & Wine New Zealand and the former National Foods Business will be referred to as Lion – Dairy & Drinks. In most cases the company will simply be known as Lion unless a distinction needs to be made between business units.

Like most companies across retail, grocery and other consumer goods sectors, Lion experienced tough market conditions during the half.

Given the footprint of the Lion business, in particular its strength in Eastern Australia and the South Island of New Zealand, and the timing of Lion’s financial year, the six months reflected in this release rank as the most challenging market conditions in the Company’s recent history. Lion saw revenue declines across its Australian businesses driven by poor weather, weak consumer demand, natural disasters and deep retailer discounting on white milk and equally challenging circumstances in New Zealand.

Lion CEO Rob Murray said: “Low consumer confidence, fuelled by sustained economic uncertainty and rising cost of living pressures, continues to impact spending in both Australia and New Zealand. These softer trading conditions have been compounded by natural disasters in Lion’s key markets, including the February earthquake in Christchurch, the coldest and wettest East Coast spring and summer for decades, and the March quarter was further affected by the timing of Easter in April instead of March.

“Since the end of the half, Lion’s Australian beer business has recovered market share, returning to its long term trend.”

Beer, Spirits and Wine

Lion’s beer, spirits and wine divisions in Australia and New Zealand delivered operating earnings before interest and tax (EBIT) of $308.9 million, a decrease of 10.8%[1]. For the period, revenue declined 6.3% to $1.178 billion.

Australia

Reflective of an overall decline in the beer market Lion’s beer, spirits and wine division in Australia saw volumes reduce 10.3% leading to an 8.3% revenue decline to $824.2 million. This was in part due to the timing of Easter in April instead of March.

Having grown volume share each year since 2006[2], Lion saw some contraction in the half due to significant pricing activity on key competitor brands and the Company’s high share in Queensland and New South Wales, with both markets suffering declines following the floods. The company estimates the contraction of the Queensland market, driven by the impact of the floods, reduced Lion’s share of the national market during the half by approximately 0.5 of a share point.

Despite this, Lion remained focussed on managing its business for the long term with a focus on driving a sustainable balance between volume, pricing and mix.

The business also conducted a recall in the lead up to Christmas 2010 on select batches of key brand Boag’s due to a bottle design fault. While significant effort was made to minimise the impact on supply, there was a one-time volume impact in the half. Key brands in the Boags portfolio, James Boag’s Premium and Boag’s Draught, have since recovered strongly.

New innovations XXXX Summer Bright Lager, Hahn Super Dry 3.5, Tooheys Extra Dry 5 Seeds and Australia’s leading craft beer trademark James Squire continued their impressive growth. XXXX Summer Bright Lager remained the biggest contributor to volume growth[3] of any brand in the country, doubling volumes year on year.

Wine

The wine industry remained challenging, with the strong Australian dollar continuing to undermine returns from key export markets and an oversupply of grapes maintaining downward pressure on pricing in domestic and international markets. Despite this, wine saw only moderate volume and revenue declines in the half. Wine is a very small part of Lion and the Australian business remains focussed on executing its targeted premium wine strategy.

New Zealand

Overall Lion’s beer, spirits and wine volumes in New Zealand remained stable and revenues increased 4.4% to NZ$356.6 million, assisted by the first time inclusion of wine brands acquired from Pernod Ricard, in particular the Lindauer trademark.

Challenging market conditions persisted due to the weak New Zealand economy and ongoing cautiousness among consumers. This was intensified by the devastating Christchurch earthquake in February 2011, which also impacted Lion’s operational facilities, causing the closure of Lion’s Christchurch brewing operations.

The half saw a decline in Lion’s beer volumes of 5.2%, driven by an overall decline in the beer market and the timing of Easter in April instead of March. Spirits and RTD volumes experienced a smaller decline of 2.1%, while cider experienced strong growth off a small base, with Lion achieving category leadership. As indicated above, wine volumes increased significantly.

Dairy and Drinks

As previously communicated, conditions in both the dairy and juice sectors remain very difficult for farmers and processors alike.

Lion has quality dairy and drinks brands that require investment to reach their full potential and remains committed to patient investment in its core strategic assets – its people, brands and production assets – to deliver sustainable growth over the long term.

Lion’s dairy and drinks business is still a long way from achieving an acceptable return on invested capital and continues to face significant margin pressures in both dairy and juice.

The dairy and drinks division delivered operating earnings before interest and tax (EBIT) of $68.3 million, a decline of 43.2%[4]. Revenue declined 9.4% to $1.4 billion, driven by the loss of key private label contracts and a decrease in export sales due to the impact of the strong Australian dollar.

Lion’s white milk volumes declined 10.9%, largely driven by the private label contract losses, however this was compounded as deep discounting saw consumers switch from branded products to private label and from convenience stores to grocery – diluting the profit pool available to all players in the supply chain.

Despite these conditions in white milk, Lion’s branded dairy beverages performed well, driven by the launch of Dare in West Australia and Victoria, while Yoplait and Farmer’s Union drove an increase in yoghurt sales.

Lion also announced the results of a review of its cheese manufacturing assets during the half, which included a $132 million investment into its cheese manufacturing site in Tasmania.

Outlook

Despite the tough trading conditions experienced in the first half, Lion remains committed to its strategy of patient investment in its core strategic assets to drive sustainable growth in the long term.

Tough conditions have persisted across all Lion’s key markets; however the Company expects the beer market to return to historical trends when the current cyclical consumer pressures moderate.

Since March, Lion’s Australian beer market share returned quickly to long-term trend after a moderation of the significant competitor pricing behaviour seen in the first half [5]. While the market volume contraction continues, over the last quarter Lion volume declines have been at a slower rate than the market.

The classic full-strength beer segment in Australia is in long term decline, however Lion’s portfolio is well positioned to capitalise on key market trends such as wellbeing, premiumisation and the growth of consumer repertoires, with consumers on average now choosing between more than seven different beer brands.

Lion markets the leading craft beer trademark in James Squire and the leading mid and light alcohol products in XXXX Gold and Hahn Premium Light.

Lion’s two new low-carb market entrants, Hahn Super Dry 3.5 and XXXX Summer Bright Lager, are both performing well and Lion achieved leadership in the full-strength low-carb segment for the first time during the half.

Considering the recall during the half’s key selling period, the Boags portfolio performed well and Lion believes it has significant further growth potential.

Lion’s beer, spirits and wine division in New Zealand is recovering from the Christchurch earthquake, with the business announcing a $43 million investment across three sites in New Zealand to compensate for lost production at its damaged Canterbury Brewery, located in the Christchurch CBD[6].

Lion’s dairy and drinks business faces significant challenges in delivering sustainable returns, with continued input cost and margin pressures. The business remains focussed on investment in innovation and its high potential brands, to drive differentiation and value in the market for the benefit of all stakeholders.

We believe business success comes from investing in our people and brands and by constructively engaging our stakeholders. Lion employs close to 8,000 people across Australia and New Zealand and delivers revenues in excess of AU$5 billion.

In addition to direct employment, we make a significant contribution to the Australian and New Zealand economies. We are one of the region’s largest purchasers of agricultural goods and an integral component of the retail, hospitality and tourism industries.

Our products accompany life’s sociable moments, whether it’s a family meal or good times at the pub with friends. Dairy, juice, soy and the responsible enjoyment of alcohol beverages are all part of a healthy lifestyle for many people and we aim to maximise the community wellbeing arising from the enjoyment of our products while playing a leading role in helping the community minimise misuse.

[6] This includes building a warehouse and distribution centre at the Canterbury Brewery site, an upgrade to Speight’s Brewery in Dunedin to increase capacity, and investment in The Pride in Auckland to enable the brewing of specialty beers.